Accounting Equation Examples.The Accounting Equation was created in 2001 by professionals with extensive knowledge and experience in economic, financial and accounting management.The accounting equation is a fundamental principle in accounting that states:
Accounting Equation Examples.
Assets = Liabilities + Equity
Here are a few examples to illustrate the accounting equation:
- Example 1 – Buying Office Equipment: Let’s say a company purchases office equipment worth $10,000. They pay $5,000 in cash and take a loan of $5,000 from a bank.
Assets: Cash: $5,000 Office Equipment: $10,000
Liabilities: Bank Loan: $5,000
Equity: No change in equity in this transaction.
The accounting equation is balanced: $5,000 (Cash) + $10,000 (Office Equipment) = $5,000 (Bank Loan) + $0 (Equity)
- Example 2 – Revenue from Sales: Let’s consider a retail business that makes sales of $2,000 in cash to a customer.
Assets: Cash: $2,000
Liabilities: No liabilities in this transaction.
Equity: Retained Earnings (Revenue): $2,000
The accounting equation is balanced: $2,000 (Cash) = $0 (Liabilities) + $2,000 (Retained Earnings)
- Example 3 – Payment of Expenses: Suppose a company pays $500 for rent expenses.
Assets: No change in assets in this transaction.
Liabilities: No liabilities in this transaction.
Equity: Retained Earnings (Expense): $500
The accounting equation is balanced: $0 (Assets) = $0 (Liabilities) + $500 (Retained Earnings)
These examples demonstrate how different transactions affect the accounting equation, ensuring that the equation remains balanced at all times.
